International Journal of Economics and Financial

Issues
ISSN: 2146-4138

available at http: www.econjournals.com

International Journal of Economics and Financial Issues, 2018, 8(5), 184-189.

Inequality of Interregional Development in Riau Indonesia; Panel

Data Regression Approach

Muhammad Hidayat1*, Ranti Darwin2, M. Fikry Hadi3

Department of Economics, Faculty Economic and Business, Universitas Muhammadiyah Riau, Indonesia, 2Department of
Economics, Faculty Economic and Business, Universitas Muhammadiyah Riau, Indonesia, 3Department of Economics, Faculty
Economic and Business, Universitas Muhammadiyah Riau, Indonesia. *Email: m.hidayat@umri.ac.id

ABSTRACT
This study aims to analyze the trends and factors of inequality of inter-regional development in Riau Province period 2011–2016. Analyzer used in
the form of index Theil, Bonet index, and regression of panel data with fix effect model. The analysis result with Theil and Bonet index shows the
decreasing trend of interregional development inequality, and the source of inequality comes from within the development area (within) with the
percentage of 58–68%. The result of fixed effect model regression states that the variable of fiscal decentralization, government expenditure, Human
Development Index, and economic growth have negative and significant relation to inequality. While the variables of natural resource differences
have a positive and statistically insignificant relationship.
Keywords: Inequality Development, Data Panel Regression, Riau
JEL Classifications: D63, O53, R58

1. INTRODUCTION
The Agenda 2030 for Sustainable Development Goals or SDGs
is a new development agreement that encourages shifting
changes toward sustainable development based on human rights
and equality to promote social, economic and environmental
development. SDGs are enforced with universal, integration
and inclusive principles to ensure that no one will be missed
or “No-one Left Behind.” SDGs consist of 17 Goals and 169
targets in order to continue the efforts and achievement of the
Millennium Development Goals that ended late in 2015 ago. One
of the global goals compiled in the 2030 sustainable development
agenda is to reduce inequality within and among countries (SDGs
Bappenas, 2017).
Riau Province is one of the areas that serve as the center of trade
of western Indonesia and the region which is included in the main
corridor of the Master Plan for the Acceleration of Economic
Development of Indonesia (MP3EI) Sumatra region. In the
process of regional development needs to be identified about the
potentials and problems of the region. According to that then
at least the existing problems can be anticipated and utilize its
potential optimally.
The economy of Riau Province over the last 5 years with the use
of GDP data including oil and gas, since 2011 has been growing
positively with a fluctuating rate, with the growth rate in 2011
at 5.57% and in 2015 by 0.22% and the average growth of 2,
95%. Furthermore, with the use of data without oil and gas Riau
economic growth rate in 2011 amounted to 7.76% and continued
to fluctuate until 2015 to 2.01% with an average growth of 4.90%.
Meanwhile, the distribution of Riau Province’s revenue, based
on Gini index data for 2011–2015 shows that in general in Riau
Province there is a fluctuating change from 0.360 in 2011 to 0.400
in 2012, in 2013–2014 decreased by a value of 0.37 and 0.35, then
in 2015 again increased from the previous year to 0.36. Changes
from year to year still show the happening inequality between
individuals because the index is still above 0.300 (>0.300).
Economic development is related to economic growth and is
accompanied by changes in the distribution of output and economic
structure (Nafziger, 2012). Ideally, economic development will

184 International Journal of Economics and Financial Issues | Vol 8 • Issue 5 • 2018
 Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach
result in high economic growth while increasing prosperity and
reducing the level of development inequality. This is in contrast
to the general condition occurring in Riau Province where the
growth of relatively high economic growth is accompanied by an
increase in income inequality.
Based on this, it needs an indicator of development performance
that has function and can be used to analyze the development
in a region. Inequality also often occurs significantly between
districts/cities within the province itself. It is further said that
interregional inequality occurs as a consequence of concentrated
development. By identifying the factors that cause inequality in
development, it is expected to anticipate the inequality in order
to synchronize the development of the region can be immediately
created.
Theoretically, the relationship of economic growth with Inequality
is known as the Kuznets hypothesis and the neo-classical
hypothesis which states that at the beginning of development will
be accompanied by an increase in income/development inequality.
The research on this topic has grown constantly. Overseas
research conducted by Barro (2000); Frank (2009); Halter= et al. IBi ,t
(2014); Benjamin et al. (2017) and domestic research by Sari
and Pujiyono (2013); Dewi and Ida (2014); Bakri et al. (2016);
Hidayat and Rahayu (2018) the findings indicate that the long-term
relationship between inequality and growth is naturally positive in
the hypothesis of Kuznet and driven primarily by concentrations
at each income level.
Maslikhina (2016) states that the occurrence of interregional
inequality in Russia during the period 1994–2014 using Theil
index. Spatial inequality level, tendencies and structural features
in Russia as a whole and in several Russian macro-regions (federal
districts) were identified. The link between interregional inequality capita district/city; PDRB PCRiau,t = GRDP per capita Province.
in Russia and economic growth was identified.
Research conducted by Bonet (2006) states that the effect of fiscal
decentralization on development inequality. The similar findings
also found in research by Apriesa and Miyasto (2013) which states
that the effect of fiscal decentralization on income inequality has
a positive and insignificant relationship. The research results in
Bakri et al., (2016) declare that fiscal decentralization represented equation is written as follows (Fujita and Hu, 2001; Hidayat,
by balancing funds affects development inequality significantly
and negatively.
Based on the research by Hidayat (2014); Mopangga (2014)
stated that the influence of government expenditure and Human
Development Index (HDI) on inequality, based on the first
result states that government expenditure and HDI is a source
of inequality, while the second result states that government
expenditure of inequality and HDI can reduce inequality.
According to Sjafrizal (2012) there are several key factors that
caused the inequality of development between regions: (1) The
difference in the content of natural resources, (2) differences in
demographic conditions, (3) lack of mobility goods and services,
(4) concentration of economic region activities, (5) development
funds allocation among regions.
International Journal of Economics and Financial Issues | Vol 8 • Issue 5 • 2018
2. METHODOLOGY
The research used is descriptive quantitative research. The study
was conducted in Riau Province. The regions that are the unit of
analysis are 12 regions in Riau Province consisting of 2 cities,
Pekanbaru and Dumai and 10 districts of Kuantan Singingi,
Indragiri Hulu, Indragiri Hilir, Pelalawan, Siak, Kampar, Rokan
Hulu, Rokan Hilir, Bengkalis and Meranti Islands. The execution
time of the research is conducted for 1 (1) year. The type of data
used in this study is secondary data which means that publication
data of Central Bureau of Statistics in the form of time series data
Fiscal Decentralization, Government Expenditure, HDI, Natural
Resources, economic growth and Inequality from 2011 to 2016.
2.1. Measurement of Regional Inequality Development
2.1.1. Bonet index
This index is a measurement made by Bonet (2006) to measure
inequality among regions in Colombia. Bonet index in the province
for period t (IBi,t)
PDRB PCi ,t
− 1 (1)
PDRB PC Prov , t
According to Kuncoro (2013), the formula states that a perfect
equality occurs when the per capita GDP per capita region is equal
to the province per capita GRDP. Bonet index value approaching
0 (zero) can mean that the per capita GDP disparity is lower. If
the value is higher, it can be interpreted that the per capita GDP
per capita among high-rise regions or regional economic growth
happens unevenly.
IBi,t = inequality of the district/city; PDRB PCi,t = GRDP per
2.1.2. Theil index
Theil index is useful for decomposing total disparities
into Inequality between regions and within regions. The
calculation of this index has the utility of analyzing geographic
concentration trends over a given period and can examine a
more detailed picture of Spatial Inequality. The Theil index
2014; Maslikhina, 2016):
n
 yi 
I= ∑y log  x
i =1
i  (2)
i 
I  = Inequality (Theil index); yi = GRDP district/city i/GRDP
Province; xi adalah Population district/city i/Population Province,
y 
yi log  i  = Partial Inequality.
 xi 
The first Theil index values are non-negative; a Theil index of 0
indicates perfect equality. Decomposability of overall inequality
into inequality between regions development and inequality within
regions development allows us to research spatial structure of
interregional inequality (Equations 3 and 4).
185
 Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach

4
periods (t = 1,2., T) and N the number of individuals (i = 1,2., N),
 yi 
I= I 0 + ∑Y I g g yi  Yg  then with panel data will have total observation units as much as
g =1 Ig =
Y∑
i∈Sg g
log 
 xi
 .............(3)

NT. If the number of time units is the same for each individual,
then the data is called a balanced panel. If otherwise, the number
 Xg  of time units is different for each individual, then it is called the
unbalanced panel (Baltagi, 2008).
I0 =
4

∑Y g
Y
log 
=g 

Yg ∑
= y X
i ∑x g i .........(4)
 Xg  i∈Sg i∈Sg
. In this research, the data used is a balanced panel. Because the
g =1  
data obtained from 12 districts/cities observed in the period of
I0 = Inequality between regions development (Between)
4
6 years so obtained 72 observations.

∑ Yg I g
g =1
= Inequality within regions development (Within)
yi = GDP district i / GDP Province
xi = Population district i/Population Province
2.2. The Definition of Operational Variables
Formulation of model analysis of the factors that influence
Inequality of development between regions in Riau Province used
several variables that can be defined as follows: (1) Inequality of
development, calculated using Theil index and Bonet index. The
Theil index is used to identify inequality between regions and
the Bonet index is used in the equations of panel data regression
model; (2) fiscal decentralization with the measurement of the
degree of fiscal decentralization which is the amount of the
Original Regional Revenue section of all total local revenue
received. The unit of the fiscal decentralization variable is percent;
(3) Government expenditure by measuring the ratio of government
expenditure to GRDP; (4) HDI used in the publication of the
Central Bureau of Statistics; (5) Natural Resource Difference
(SDA) is calculated based on GDP share of mining sector by
district/city; (6) Economic growth, this variable uses GDP data
with constant 2010 prices during the period 2011–2016, the value
of units used in the form of percentages.
2.3. The Determinants of Development Inequality
Analyzing the factors that influence the inequality between
in Riau Province used regression of panel data. The function
formed resembles the regression equation used by Cahyono et al.
(2017); Hidayat (2014); Mopangga (2014) with inter-regional
Inequality (Ineq) is allegedly influenced by the variables of fiscal
decentralization (DF), government expenditure (PP), HDI (IPM),
natural resource (SDA) and economic growth (LPE). The variables
that have the greatest regression coefficient value, are considered to
have an important role in influencing the fluctuation of inequality
in Riau Province.
The general form of an equation:
Ineq = {DF, PP, IPM, SDA, LPE}
Linear equations of panel data regression model:
Ineqit = αit+β1 DFit+β2 PPit+β3 IPMit+β4 SDAit+β5 LPMit εit(6)
2.4. Regression Panel Data
Pooled data panel is a combination of cross section and series
data. In other words panel data is the data from some of the same
individuals observed in a certain period of time. If we have T time
In general, by using panel data, it will generate different intercepts
and slope coefficients on each company and time period.
Therefore, in estimating equation (6) it will be highly dependent
on the assumptions we make about intercepts, slope coefficients,
and disturbance variables.
In panel data model analysis there are three approaches: Pooled
least square (PLS), fixed effect model (FEM), and random effect
model (REM). In this study, the model used only the FEM.
2.5. FEM
Problems arising from the use of PLS method is the assumption
that intercepts and coefficients of each variable are the same in
each inter-area observed. To take into account, the individuality of
each cross-section unit can be done by making a different intercept
in each region. In the fixed effects method, dummy variables are
added to change the intercept, but other coefficients remain the
same for each observed region.
Based on the assumption of the structure of the residual variance-
covariance matrix, in the fixed effects model, there are 3 estimation
methods that can be used: (1) Ordinary least square (OLS/LSDV),
if the residual variance-covariance matrix structure is assumed to
be homoskedastic and no cross-sectional correlation; (2) weighted
least square, if the structure of the residual variance-covariance
matrix is assumed to be heteroskedastic and there is no cross-
sectional correlation; (3) seemingly uncorrelated regression, if the
structure of the residual variance-covariance matrix is assumed
to be heteroskedastic and there is a cross-sectional correlation
(Widarjono, 2013).
2.6. Hypothesis Testing
Before testing hypothesis (F-test, T-test, and R2), then first the
model is tested to fulfill best linear unbiased estimator requirement
that is tested with classical assumption test, that is autocorrelation
test, multicollinearity test and heteroskedasticity test (Widarjono,
2013).
(5)
3. RESULT AND DISCUSSION
3.1. Trends Inequality of Development
Theil index calculation results in Figure 1 show that there is
inequality in the development of Riau Province, during the
2011–2016 which continues to fluctuate. From 2012 until 2016
there was a decrease (convergence) from 0.183 to 0.134, this
indicates the occurrence of equitable regional development.
Furthermore, the decline was due to the economic improvements

186 International Journal of Economics and Financial Issues | Vol 8 • Issue 5 • 2018
 Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach

occurring in each region and the period of transition of Figure 1: Trend Theil index - Inequality in Riau Province, 2011–2016
emerging that has been running for more than 10 years. This
phenomenon is in line with the neo-classical hypothesis which
at the beginning of development will be followed by Inequality
and if economic conditions have stabilized, then inequality will
decrease.

The result of Theil index decomposition will give an overview

of the main source of inequality. Based on Figure 2 in the period
2011–2016, the largest source of inequality in Riau Province comes
from within regions development with the fluctuation trend in the
year 2011 amounted to 58.46% and in 2016 to 68.62%. Whereas
inequality that comes from between regions development only
accounted for about 30–40%. Figure 2: Percentage Source of Inequality in Riau Province, 2011–2016

The used of the Bonet index provides an overview of inequality

occurring in each region, the smallest or near-zero values
indicating low inequality and a value close to one is indicating
very high inequality. The calculation results are presented
in Table 1. Based on the table, each region experiences
fluctuations. The regions that have the greatest value of Siak
Regency, Pelalawan, Rokan Hulu, Kampar, Dumai city, and
Indragiri Hilir. Conversely, the area that has the smallest value
is Pekanbaru City.

Moreover, the region where experiencing an increasing trend Table 1: Trend Bonet index value in Riau Province,
every year is Kuantan Singingi Regency, Bengkalis. Aside from 2011–2016
those two areas, the inequality is experiencing a downward trend. Kabupaten/Kota 2011 2012 2013 2014 2015 2016
The integration of both indexes concludes that the Inequalities in Kuantan Singingi 0.070 0.132 0.146 0.153 0.120 0.136
Riau Province has experienced a downward trend starting from Indragiri Hulu 0.058 0.124 0.138 0.140 0.088 0.093
2012 to 2016. Indragiri Hilir 0.180 0.104 0.078 0.058 0.047 0.026
Pelalawan 0.478 0.399 0.364 0.333 0.304 0.262
Siak 0.607 0.598 0.583 0.554 0.557 0.526
3.2. Econometric Results - Panel Data Regression Kampar 0.218 0.187 0.176 0.185 0.189 0.190
To identify the factors influencing inequality of inter-regional Rokan Hulu 0.371 0.370 0.375 0.383 0.392 0.394
development in Riau Province, it used regression data panel with Bengkalis 0.080 0.152 0.163 0.179 0.206 0.213
FEM approach. Summary of results regression FEM presented in Rokan Hilir 0.152 0.121 0.123 0.123 0.121 0.125
Table 2. Based on the research results obtained by the regression Meranti 0.269 0.179 0.142 0.114 0.076 0.051
Pekanbaru 0.098 0.057 0.057 0.050 0.018 0.002
equation as follows:
Dumai 0.205 0.192 0.197 0.220 0.205 0.177

Ineqit = 1.378–0.0013 DF-0.0055 PP-0.0161 IPM+0.0009 SDA-

0.0039 LPE+εit
The result of regression FEM for the value of R2 is 0.9841, it shows
that 98.41% consisting of fiscal decentralization, government
expenditure, HDI, natural resource difference, and economic
growth influence the inequality of inter-regional development in
Riau Province. Meanwhile, the value of adjusted R2 is 0.9795,
which is used to compare the model when there are additional
variables and the use of other models. An f-statistic P = 0.0000
gives the meaning that simultaneously significant variables to the
inequality of development that occurred.
Based on Table 2, it gives information about Inequality value of
each region assuming another variable is considered zero (Cateris-
paribus). The result of regression indicates that Siak, Pelalawan,
Rokan Hulu, Kampar, Dumai, and Pekanbaru City have positive
values with the meaning that this region has a share as the cause
of Inequality to other regions.
Based on the value of coefficient and probability T, fiscal
decentralization has a negative and significant relation
to Development Inequality. This suggests that the fiscal
decentralization that has occurred may reduce the level of
inequality that occurred in Riau Province. This situation is because
the original revenue of each region has a total area of about 3–9%
for the district and 10-40% for the City area. Thus, each region
will be able to independently improve the economy.
The results of this study are in line with research by Bakri et al.
(2016) which states that fiscal decentralization has a negative and
significant relationship to development inequality. This research
is also in agreement with the theory issued by Sjafrizal (2012),
stating that fiscal balancing or decentralization funds are one of
the factors to reduce the level of development inequality.
Government spending has a negative and significant relationship
to development inequality, this is based on a negative coefficient

International Journal of Economics and Financial Issues | Vol 8 • Issue 5 • 2018 187
 Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach

Table 2: Summary of regression results FEM

Method: Pooled EGLS (cross‑section weights)
Variable Coefficient Standard error t‑statistic P
C 1.378860 0.135060 10.20927 0.0000
DF? −0.001373 0.000336 −4.083323 0.0001
PP? −0.005564 0.002148 −2.590325 0.0123
IPM? −0.016189 0.001725 −9.386082 0.0000
SDA? 0.000991 0.000863 1.147854 0.2560
LPE? −0.003993 0.000997 −4.006084 0.0002
Fixed effects (cross)
_BENGKALIS‑‑C −0.031062 _MERANTI‑‑C −0.125537
_DUMAI‑‑C 0.071854 _PELALAWAN‑‑C 0.146533
_INHIL‑‑C −0.200736 _PKU‑‑C 0.025818
_INHU‑‑C −0.134965 _ROHIL‑‑C −0.151723
_KAMPAR‑‑C −0.011359 _ROHUL‑‑C 0.138546
_KUANSING‑‑C −0.111790 _SIAK‑‑C 0.384421
R‑squared 0.984135 Mean dependent var 0.296847
Adjusted R‑squared 0.979520 S.D. dependent variable 0.282819
S.E. of regression 0.036486 Sum squared residual 0.073217
F‑statistic 213.2405 Durbin‑Watson statistic 1.077911
Prob (F‑statistic) 0.000000
Significant level 0.05, FEM: Fixed effect model

value and a small probability of T of 0.05. This result states that
government spending is able to reduce the inequality of inter-
regional development that occurred in Riau Province. This is
because the ratio of Government Expenditure to GDP generated
has a small value which means that ongoing Government
Expenditure can increase the output of production value or GDP
of each region, in other words, there is efficiency in government
expenditure. In line with this, each region in order to be able to
maintain the value of the existing ratio. However, the results
of research are not in line with Mopangga research (2014) and
Hidayat (2014) states that Government Expenditure is a source
of inequality.
Based on the value of coefficient and T probability, the HDI has
a negative and significant relationship to development inequality.
The situation is caused by the HDI value of each region has no
significant difference. This fact can not be separated from the
performance of each region that prioritizes human development
both in terms of planning and implementation at the stage of
development.
This result is in line with research by Hidayat (2014) which
resulted that the HDI has a negative effect on development
inequality that occurred in Riau Province. Increasing the
education of certain levels will improve the quality of human
resources that will impact on the use of physical capital to be
more efficient and labor will become more productive. Thus,
the productivity of both physical capital and labor will increase,
and will eventually increase economic growth and development
gaps may decrease.
The different natural resources that exist in each region is one of
the factors that can increase the inequality of development in Riau
Province. This is based on the value of the coefficient is marked
positive. This result is in accordance with the theory proposed
by Sjafrizal (2012), that one of the factors affecting development
inequality is the difference in the content of natural resources.
Furthermore, on the basis of the probability that T yields are
insignificant, this suggests that the differences in natural resources
have not had a great effect in the short term on increasing inequality
in development. Additionally, to anticipate long-term events, local
governments have a duty to continue to optimize the potential
of the economy, so it is not entirely dependent on the results of
mining both oil and gas and minerals.
According to Table 2, economic growth has a negative and
significant relationship to development inequality. This state shows
the convergent position of inequality. This phenomenon when
synchronized with a neo-classical hypothesis or reversed U-curve,
the current position is in the process of decreasing inequality or
convergence conditions.
This result is in line with research by Barro (2008); Halter et al.
(2014), that economic growth is negatively related to development
inequality. Meanwhile, these results are not in line with research
by Bakri et al. (2016); Dewi and Ida (2014); Frank (2009); Sari
and Pujiyono (2013) that economic growth is positively related
to development inequality, in other words, economic growth that
occurs can increase the inequality of development.
4. CONCLUSION
The calculation results with Theil index during 2012–2016 began
to decrease (convergence), and the source of inequality comes from
within the development area (within) with the percentage of 58–
68% of total inequality. The Bonet index also shows a downward
trend (convergence). Inequality during the same period, and based
on this index the region has the greatest value of Siak, Pelalawan,
Rokan Hulu, Kampar, Dumai, and Indragiri Hilir. The result of
FEM regression indicates that the variable of fiscal decentralization
(DF), government expenditure (PP), HDI (IPM), and economic
growth (LPE) have a negative and significant correlation.
Meanwhile, the variable of Natural Resource Difference (SDA)
has a positive and statistically insignificant relationship.

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5. ACKNOWLEDGMENT
This research can be done with the encouragement and assistance
from various parties. We are from the research team, thanking
the Ministry of Research, Technology and Higher Education for
funding this research and providing useful feedback in conducting
this research. We would also like to thank the Universitas
Muhammadiyah Riau, the Central Bureau of Statistics (BPS) and
the Regional Development Planning Agency (BAPPEDA) as well
as various parties who helped provide support to the research team
in preparing this research.
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